Understanding Trading Halts — Why do some crypto exchanges stop trading for some time?
Has it ever happened to you, that you’ve found the crypto market to be quite volatile, and the values of all the cryptos that you’re holding are acting out crazily and you see your wallet value either plummeting or soaring every second? At that very moment many of us try to capitalize on our profits or sell out our holdings, in hopes of minimizing the losses or some of us even try to buy the dip, and all this; while the values of the cryptocurrencies are still quite fickle and unsettled. While doing that, if we receive an alert from the platform stating that trading has been halted for sometime, it does get more than irkful.
But have you ever wondered, why do crypto exchanges halt trading at such a volatile stage?
On a crypto exchange and trading platform, there goes on more than what is perceptible up front to the user. For starters, an exchange must ensure that the values of the cryptocurrencies that are listed over it, are similar to those in the global market. In addition to that, every second there are thousands of different algorithms running in tandem with one another, in order to execute trades, create and manage orders, manage wallets and so much more. Hence, the exchanges ensure that these algorithms do not encounter any bugs or glitches.
With this stated, we must first understand what a trading halt is and then the necessity of implementing one.
What does Trading Halt mean?
A trading halt is a temporary suspension of trading for a particular cryptocurrency or multiple cryptocurrencies at one exchange or across numerous exchanges. Trading halts are usually implemented in response to a rumor or a news announcement, to correct an order imbalance, as a result of a technical glitch, or due to regulatory concerns. The specific reasons for a trading halt may vary depending on whether it involves any particular cryptocurrency or a particular exchange platform.
When a trading halt is in effect, open orders (orders that are getting executed) may be canceled and options still may be exercised. Trading halts are relatively prevalent in the crypto realm, since exchanges aren’t subject to the same severe controls as traditional exchanges and operate in a less regulated environment.
Why are Trading Halts implemented?
As mentioned earlier, crypto exchanges can implement trading halts to carry out routine maintenance of the infrastructure, to correct an order imbalance, as a result of a technical glitch, due to regulatory concerns or in response to a rumor or a news announcement.
An order imbalance happens when there are too many buy or sell orders for a particular cryptocurrency on a trading exchange, making it impossible to match buyers’ and sellers’ orders. Imbalances can move the value of the cryptocurrency to the upside or the downside. Panic selling by a large number of traders, or a major sell off, via market orders may trigger an order imbalance.
Incidents that can lead to order imbalances include leaks of information or rumors that have the potential to affect the shares of a public company. For example, there might be a legislation gaining momentum that could affect the company’s operations. This might instill panic among the holders, which therefore can trigger a major sell off. Consequently, in order to combat such situations and maintain the price of a crypto over the exchange, trading halts might get implemented.
Trading Halts also safeguard the traders over an exchange from incurring huge losses, in situations where they might attempt to sell off their holdings under panic via market orders, which in many instances might result in their orders getting executed at lower than the anticipated value.
Although pretty rare, another reason why any exchange might impose a trading halt is that they might have encountered an internal technical glitch, such as a bug in their trading algorithm, which might cause the prices of the cryptocurrencies that are listed over it, to plunge or surge instantly. In addition to rare technical glitches, exchanges also impose trading halts to carry out schedule maintenance, in order to provide a seamless trading experience to the traders on their platform.
Key Takeaways:
- A trading halt is a temporary suspension of trading for a particular cryptocurrency or multiple cryptocurrencies at one exchange or across numerous exchanges.
- Crypto exchanges usually implement trading halts to carry out routine maintenance of the infrastructure, to correct an order imbalance, as a result of a technical glitch, due to regulatory concerns or in response to a rumor or a news announcement.
- It can quite aptly be said that these trading halts can be thought of as a protection which the crypto exchanges implement to not just only to protect the market as a whole, but also their customers.
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